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THE WAR REVENUE ACT OF 1917 

October 3, 1913, President Wilson signed his first important 
revenue measure, the Underwood Tariff bill. Exactly four years 
later, October 3, 1917, he signed the greatest War Revenue bill 
yet enacted. The former was designed to raise annually about 
three quarters of a billion dollars for ordinary purposes. The 
latter is designed to raise annually over two and one half billion 
dollars exclusively for war purposes, that is, over and above ordi- 
nary revenues. The former bill in the first year brought in nearly 
$300,000,000 from customs, a slightly greater amount from ordi- 
nary internal revenues, and only $71,000,000 from the new in- 
come tax. The greatly increased importance of this new tax in 
the recent law is very significant. The latest bill, which is super- 
imposed upon the ordinary revenue measure, is designed to get 
nothing worth mentioning from customs, but $850,000,000 from 
the war income tax, and $1,000,000,000 from its brother, the war 
profits tax. The amended revenue bill of September 8, 1916, as 
further amended March 3, 1917, was expected to increase the 
annual revenues from three quarters of a billion to a billion dollars 
or more, the increase being for preparedness. This latter revenue 
law and the new war revenue act together are expected to yield 
three and a half to three and three quarter billion dollars, or about 
five times as much as our federal taxes before the war. 

This increase is immense. It would just about pay, in a single 
year, the total of our national debt at the end of the Civil War, 
or it would pay nearly three times our national debt at the time 
we entered this war last April. But gigantic as this increase is, 
it only begins to provide for the appropriations and authoriza- 
tions of over $21,000,000,000 which have already been made for 
the current fiscal year ending June 30, 1918. 

Soon after Congress met last April, the Ways and Means Com- 
mittee took up the matter of revenue for war purposes. A very 
hastily considered bill was passed by the House of Representa- 
tives on May 23. The Senate Finance Committee, and later the 
Senate itself, took up the matter more carefully and deliberately 
and passed a much amended bill on September 10. The confer- 
ence committee labored for two weeks or more but its report was 
adopted promptly by both houses with very little dissent and be- 
came law October 3, as mentioned. 

The House bill was estimated to yield about $1,800,000,000 



792 



Roy G. Bldkey 



[December 



and the prevailing sentiment in the Senate indicated a reduction 
to $1,500,000,000, or less. But during the consideration of the 
bill, Secretary McAdoo's estimates of war needs grew rapidly 
and, under the pressure of these greater needs, the Senate passed 
a bill estimated to yield $2,400,000,000. This was slightly in- 
creased by the conference committee. The following table gives 
the estimated revenue from the House, Senate, and the enacted 
bills, respectively. 

Table 1. — Estimated Revenue from the Several Bills. 



Incomes, individual and cor- 
porate 

War tax on 1916 incomes 

Excess profits 

Spirits, liquors, wines 

Soft drinks, syrups, etc , 

Tobacco and manufactures 
thereof 

Freight transportation 

Express transportation 

Passenger transportation . . . 

Pipe lines 

Seats and berths 

Electric lights, gas, telephone 
service 

Telegraph and telephone mes- 
sages 

Insurance 

Automobiles 

Tires and tubes. i 

Musical instruments, etc 

Motion picture films 

Jewelry 

Sporting goods 

Pleasure boats 

Perfumes and cosmetics 

Proprietary medicines 

Chewing gum 

Cameras 

Admissions 

Club dues , 

Stamp taxes, etc 

Estate taxes 

Customs duties 

First-class mail matter 

Second-class mail matter 

Munition manufacturer's tax.. 

Totals 



House Bill 



(Millions) 

$598.7 

108.0 

200.0 

151.0 

20.0 

68.2 
77.5 
15.0 
75.0 
4.5 
.7 

30.0 

7.0 

5.0 

68.0 

12.5 

7.0 

7.0 

7.5 

2.0 

.5 

4.7 

8.5 

1.0 



60.0 
1.5 

33.0 

6.0 

200.0 

70.0 

19.0 



$1,868.8 



Senate Bill Enacted Bill 



(Millions) 

$842.2 



1,060.0 

207.0 

11.0 

56.6 
77.5 
18.0 
37.5 
4.5 



7.0 

li'.o 



.8 

.5 

1.9 

3.4 



.5 
18.0 

22.6 



$2,411.6 



(Millions) 

$851.0 



1,000.0 

193.0 

13.0 

63.4 
77.5 
10.8 
60.0 
4.5 
4.5 



7.0 

5.0 

40.0 

3.0 

3.0 

4.5 

1.2 

.5 

1.9 

3.4 

.4 

.7 

50.0 

1.5 

9.0 

5.0 

'mo 

6.0 
25.0 



2,514.8 



The hardest fought controversies between the two houses were 



1917] The War Revenue Act of 1917 793 

over the war profits tax and the taxes on second-class mail matter. 
Other important differences which were not so strenuously con- 
tested were over taxes on customs, inheritances, automobiles, hold- 
ing companies, and undistributed surpluses. But the fundamental 
controversy throughout was not the one between the two houses 
but the one between different members in each house; namely, the 
relative amount of the total war expenditures that should be raised 
by taxation; and its corollary, the amount of taxes that should 
be levied upon large incomes and wealth. The minority report of 
the Senate Finance Committee was devoted almost exclusively to 
this issue. These controversies and the more important new fea- 
tures of the bill will be taken up somewhat more in detail under 
the treatment of the several sections or titles below. 

The bill as passed is composed of thirteen so-called "titles" 
as follows: 

I — War Income Tax. 
II — War Excess Profits Tax. 
Ill — War Tax on Beverages. 

IV — War Tax on Cigars, Tobacco and Manufactures thereof. 
V — War Tax on Facilities Furnished by Public Utilities and In- 
surance. 
VI — War Excise Taxes. 
VII — War Tax on Admissions. 
VIII— War Stamp Taxes. 
IX — War Estate Tax. 
X — Administrative Provisions. 
XI — Postage Rates. 
XII — Income Tax Amendments. 
XIII — General Provisions. 

It should be kept in mind throughout the discussion of all the 
titles that the War Revenue act of 1917 treats the Revenue act 
of September 8, 1916, 1 as a basic law and that, with the exception 
of Title XII, Income Tax Amendments, and some minor matters, 
this new act leaves the basic act intact and levies extra taxes for 
war purposes. For example, Title I, War Income Tax, levies a 
war "normal" tax of 2 per cent on the incomes of individuals and 
4 per cent on the incomes of corporations. These taxes are not 
in place of, but in addition to, the 2 per cent "normal" tax on 
both individuals and corporations as provided for in the act of 
September 8, 1916. Furthermore, the reduction of the individual 
exemptions of $3,000 for unmarried persons and $4,000 for heads 

i Discussed in the December, 1916, issue of this Review, pp. 837-850. 



794 



Roy G. Blakey 



[December 



of families to $1,000 and $2,000, respectively, does not apply to 
the income tax of the 1916 law but only to the war income tax 
of the 1917 law. 

There are enough exceptions to the general rule stated above, 
however, to make it rather confusing for the layman, and even to 
the initiated, to discover just what is the sum total of all taxes 
in many specific cases. This condition of affairs and ambiguities 
inherent in the nature of several matters, particularly in the defi- 
nition of capital under the war excess profits title, make it very 
difficult to give a clear-cut and adequate presentation of the act, 
and they seem to leave also many opportunities for misunder- 
standings and even for litigation. 

In addition to the war "normal" income taxes, Title I imposes 
also war "additional" income taxes, or surtaxes, upon the incomes 
of individuals (not of corporations) as indicated in the following 
table : 



Table 2. — "Additional Income Taxes." 




Part of 


income to which applicable 




(in 


thousands of dollars) 


Tax 


1913 law 


1916 law 
(still in effect) 


1917 law 


per cent 


(original law; now 
superseded) 


(superimposed 
under 1916 law) 




$20— 50 


$20— 40 


$5— 7 


1 


50— 75 


40— 60 


7— 10 


2 


75—100 


60— 80 


10— 12 


3 


100—250 


80— 100 


12— 15 


4 


250—500 


100— 150 


15— 20 


5 


500 — any excess 


150— 200 




6 




200— 250 


20— 40 


7 




250— 300 




8 




300— 500 




9 




500—1,000 


40— 60 


10 




1,000—1,500 




11 




1,500—2,000 




12 




2,000 — any excess 




13 






60— 80 


14 






80— 100 


18 






100— 150 


22 






150— 200 


25 






200— 250 


30 






250— 300 


34 






300— 500 


37 






500— 750 


40 






750—1,000 


45 






1,000 — any excess 


50 



The recent act provides for the collection at the source of only 
one 2 per cent normal income tax (either that of the act of 1916 



1917] The War Revenue Act of 1917 795 

or that of the act of 1917, apparently not both) and, so far as 
the war income tax upon corporations is concerned, it does away 
with the multiple taxation of holding companies. It will be ob- 
served in Table 1 above that the bill as passed by the Senate and 
as finally enacted, omitted the retroactive income tax upon 1916 
incomes as provided for in the House bill, and applies to 1917 
and later incomes only. This feature of the House bill was un- 
justifiable, if not defenseless. 

The War Excess Profits Tax, Title II, may be considered an 
extreme expansion of the Munition Manufacturer's Tax, Title 
III of the 1916 act; or, more properly, perhaps, of Title II of 
the act of March 3, 1917. The new act, however, reduces the 
old tax from 12% per cent to 10 per cent for 1917 and discon- 
tinues it after December 31 of this year. As mentioned above, 
it was over the war excess profits tax that one of the principal 
contests between the two houses was fought. The House pro- 
posed to allow a deduction of 8 per cent upon capital invested 
as a normal income and to tax the income in excess of this de- 
duction at a flat rate of 8 per cent. This is the provision of Title 
II of the act of March 3, 1917, which is repealed by the act of 
October 3, 1917. The Senate spokesmen 8 said that it was im- 
practicable to ascertain the "capital invested" because of the 
difficulties connected with watered stock, the value of franchises, 
good-will, and other intangible assets. They claimed that it would 
be fairer and more feasible to ascertain war excess profits by de- 
ducting the average profits of the "pre-war period" (1911, 1912, 
and 1913) from 1917 and later profits. Allowances were to be 
made for exceptional cases. The data for such computations 
were already at hand in the returns for the corporation and in- 
come taxes for the respective years. The Senate adopted, further- 
more, not an 8 per cent flat tax, but a graduated tax of from 12 
to 60 per cent upon the excess. They called especial attention 
to the fact that the railroads would be almost entirely exempt 
under the House bill because the average returns upon their cap- 
ital are less than 5 per cent; also, that the corporations making 
huge profits would not pay nearly such heavy taxes under the 
House measure as under the Senate bill. It will be noted in Table 
2 See, however, opposite attitudes of Senators Underwood and Bankhead in 
speeches of August 30 and August 16 respectively, Congressional Record, p. 
7120 et passim. 



796 Roy G. Bldkey [December 

1 above that this title of the House bill was estimated to yield 
less than one fifth that of the Senate bill. 

The enacted law was a compromise. To arrive at taxable ex- 
cess profits, there shall be deducted the average rate of profits 
upon current invested capital that was earned upon invested cap- 
ital in the pre-war period (1911-1912-1913), provided this rate 
falls between 7 per cent and 9 per cent. In any case, there shall 
be a minimum deduction of 7 per cent. The maximum deduction 
is 9 per cent, if the latter amount or more was earned in the pre- 
war period. On the excess above the allowable deduction the fol- 
lowing excess profits tax rates apply: 

Table 3. — War Excess Profits Taxes. 

On portions of net income 
from invested capital between: Rate of tax 

{Per cent) {Per cent) 

Deduction* and IS 20 

15 and 20 25 

20 and 25 35 

25 and 33 15 

33 and above 60 

iThis deduction varies from 7 to 9 per cent, according to the rate of pre- 
war profits, as explained in the text above. 

These rates apply to the excess profits, not only of corpora- 
tions but also of partnerships and individuals, though corpora- 
tions are allowed only a maximum deduction of $3,000 besides that 
mentioned above, while partnerships and individuals are allowed 
$6,000. The compensation of government officials and employees, 
federal, state, and local, is exempt from this tax. Exceptional 
cases are to be given special consideration by the Commissioner of 
Internal Revenue and are to have their deductions based upon the 
deductions of "representative" corporations, partnerships, or in- 
dividuals engaged in like or similar trades or businesses. 

"Invested capital" as used in this title means : ( 1 ) actual cash 
paid in, (2) cash value of tangible property paid for stock at time 
of such payment, (3) paid in or earned surplus and undivided 
profits at the beginning of the taxable year. Included as invested 
capital are the actual cash value of patents and copyrights paid 
for stock or shares and the bona fide cash or tangible property 
payments for good-will, trademarks and franchises. There are some 
qualifications and some differentiations between individuals, on the 
one hand, and corporations and partnerships on the other. 

The following quoted sections show how some difficult and ex- 
ceptional cases are to be handled: 



1917] The War Revenue Act of 1917 797 

Sec. 209. In the case of a trade or business having no invested 
capital or not more than a nominal capital there shall be levied, as- 
sessed, collected, and paid, in addition to the taxes under existing law 
and under this act, in lieu of the tax imposed by section two hundred 
and one, a tax equivalent to eight per centum of the net income of 
such trade or business, in excess of the following deductions: In the 
case of a domestic corporation, $3,000, and in the case of a domestic 
partnership, or a citizen or resident of the United States, $6,000, in 
the case of all other trades or business, no deduction. 

Sec. 210. If the Secretary of the Treasury is unable in any case 
satisfactorily to determine the invested capital, the amount of the de- 
duction shall be the sum of (1) an amount equal to the same propor- 
tion of the net income of the trade or business received during the 
taxable year as the proportion which the average deduction (deter- 
mined in the same manner as provided in section two hundred and 
three, without including the $3,000 or $6,000 therein referred to) for 
the same calendar year of representative corporations, partnerships, 
and individuals, engaged in a like or similar trade or business, bears 
to the total net income of the trade or business received by such cor- 
porations, partnerships and individuals, plus (2) in the case of a 
domestic corporation $8,000, and in the case of a domestic partnership 
or a citizen or resident of the United States, $6,000. 

For the purpose of this section the proportion between the deduction 
and the net income in each trade or business shall be determined by 
the Commissioner of Internal Eevenue in accordance with regulations 
prescribed by him, with the approval of the Secretary of the Treasury. 

From the above it will be seen that the Commissioner of In- 
ternal Revenue and the Secretary of the Treasury have very great 
discretionary powers; and, if these powers are upheld, they may 
determine somewhat arbitrarily and summarily, if need be, the 
"invested capital" of and, consequently, the amount of war ex- 
cess profits tax due from, any individual, partnership, or corpora- 
tion. These discretionary powers may prevent much litigation, 
and yet, if used unwisely, may cause much friction and antagonism 
to the law. Much the same might be said as to the extent and 
use of the powers of these same officials in regard to the taxes of 
the other titles of this act, but the maximum appears to be reached 
in this title. 

Title III, War Tax on Beverages, increases the existing tax 
on distilled spirits that are in bond or that are produced or im- 
ported by $1.10 per gallon, or if withdrawn for beverage pur- 
poses by $2.10 per gallon. To quote a local paper, this means 
that the tax on whiskey jumped from $1.10 to $3.20 per gallon 
from October & to the next day, October 4, and that a case which 



798 Roy G. Blakey [December 

formerly sold for $3 must now bring $8. Popular drinks at local 
cafes were reported to have been raised immediately from five to 
ten cents each. Retailers are allowed an exemption upon 50 gal- 
lons if in stock at passing of act. The tax on perfumes contain- 
ing distilled spirits is also raised by $1.10 per gallon, and the im- 
portation of distilled spirits, except from Porto Rico and the 
Philippines, is prohibited. 

The existing tax of $1.50 per gallon on beer is increased by 
a war tax of the same amount; the taxes upon still wines, grape, 
brandy, and wine spirits are doubled also. 8 

A graduated tax of from 5 to 20 cents per gallon is laid on 
syrups and extracts used in the manufacture of soft drinks, and 
most soft drinks themselves are taxed one cent per gallon. 

The extra war taxes upon tobacco and manufactures thereof, 
Title IV, are graduated. On cigars not weighing more than three 
pounds per thousand, the tax is 25 cents per thousand ; if weigh- 
ing not more than three pounds per thousand and retailing from 
4 to 7 cents each, the tax is $1 per thousand. These taxes on 
cigars increase to a maximum of $7 per thousand on those retail- 
ing at over 20 cents each. The war tax per thousand of cigar- 
ettes not weighing over three pounds is 80 cents and upon those 
heavier, $1.20. The war tax on tobacco and snuff is 5 cents 
per pound. 

The Senate raised the House rates on liquor but lowered the 
rates on tobacco, claiming that the latter rates were too high for 
maximum revenue yields. The finally enacted bill resulted in a 
compromise in each case. 

Title V, War Tax on Facilities Furnished by Public Utilities 
and Insurance, reaches sources of revenue not levied upon in this 
fashion in the basic act of 1916. Receipts from freight trans- 
portation are taxed 3 per cent, and those from express 1 cent 
for each 20 cents or fraction thereof. The carriers are made 
collectors of the taxes, though the purchasers of the services are 
to pay them. Passenger transportation is taxed 8 per cent, 
though commutation and season tickets for less than 30 miles and 
fares of less than 35 cents are exempted. Amounts paid for seats, 
berths, and staterooms in parlor cars or on vessels are taxed 10 
per cent. Telegraph, telephone, and radio messages for which 
the charge is 15 cents or more are taxed 5 cents each. 

» For the various rates, see bill; or "The New Revenue Act," American 
Economic Review, Dec., 1916, p. 845. 



1917] The War Revenue Act of 1917 799 

Insurance issued after October 81, is subject to the following 
taxes : 

(a) Life insurance: 8 cents on each $100, except that on in- 
dustrial policies not in excess of $500 the tax is 40 per cent of 
the first weekly premium. 

(b) Marine, inland, and casualty insurance: 1 cent on each 
dollar of premium. 

Reinsurance by other companies is exempt. 

Under War Excise Taxes, Title VI, manufacturers and im- 
porters of the following are taxed 3 per cent on the price sold: 
automobiles, motor cycles, musical instruments, talking machines, 
jewelry, cameras, and most of the more popular sporting goods. 
Perfumes, cosmetics, proprietary medicines, chewing gum, et cet- 
era, are taxed 2 per cent; moving picture films from one fourth 
to one half of a cent per linear foot. Graduated taxes are levied 
upon water-craft, also. In most cases, only half of the above 
rates apply to retailers' stocks on hand at the time of passage 
of this act. 

The House bill imposed a 5 per cent tax upon the manufac- 
turers and importers of automobiles and most other items taxed 
3 per cent in the enacted bill, as mentioned in the preceding para- 
graph. The Senate bill substituted for the tax on the manufac- 
turers and importers of automobiles and motor cycles an annual 
graduated tax upon the use, that is, upon the owner, of these 
vehicles. The Senate bill rates were: motor cycles, $2.50; auto- 
mobiles, the original listed retail price of which was not over $500, 
$5; $500-$750, $7.50; $750-$l,000, $10; and for each $500 in- 
crease or fraction thereof up to $3,000, $5; above $3,000, $10 
for each increase of $500 in listed price. Each year, the tax 
on the owner was to decrease 10 per cent until 50 per cent was 
reached. The House tax on automobiles was estimated to bring 
in the most revenue the first year, but the Senate bill would prob- 
ably have had as much or more effect in reducing the demand for 
cars and, if not, might have brought in more revenue if the bill 
remained in force several years. 

The War Tax on Admissions and Dues, Title Vn, is 1 cent for 
each 10 cents or fraction thereof to be paid by person paying for 
admission. It is provided, however, that the tax for children 
under twelve shall be 1 cent in every case where they are charged 



800 Roy G. Bldkey [December 

admission ; also, that pass holders, except bona fide employees and 
municipal officers upon official business, shall pay the same tax as 
those paying for admission. Five-cent admissions are exempt, as 
are ten-cent admissions within outdoor general amusement parks. 
Admissions, the proceeds of which inure exclusively to the benefit 
of religious, educational, or charitable institutions or organiza- 
tions, and admissions to agricultural fairs, none of the profits of 
which are distributed to stockholders or members, are also exempt. 

Dues and membership fees, including initiation fees, to social, 
athletic, and sporting clubs, where such fees or dues are in excess 
of $12 per year, are subject to a tax of 10 per cent of such dues 
and fees. Fraternal beneficiary societies operating under the 
lodge system are exempt. 

The taxes levied under this title are upon the several payers 
of admissions, dues, and fees, but they are to be collected by the 
recipients and to be reported monthly by the latter to the internal 
revenue collector. This is similar to the provisions for the pay- 
ment and collection of most of the taxes under Titles III to VII 
of this act. 

Some of the more important items of Title VIII, War Stamp 
Taxes, are as follows: 

1. Bonds of indebtedness: 5 cents per $100. 

2. Bonds, indemnity and surety: 50 cents. When a premium 
is charged, 1 per cent of premium. 

3. Capital stock, issue : 5 cents per share ; or, if actual value 
exceeds $100, 5 cents per $100 of actual value. 

4. Capital stock, sales or transfers : % cents instead of 5 cents 
as in 3 above. 

5. Produce, sales of on exchange: 2 cents per $100. 

6. Drafts or checks payable otherwise than at sight or on de- 
mand, and promissory notes, 2 cents per $100. (It will be noted 
that no tax is imposed upon ordinary bank checks payable at 
sight.) 

7. Conveyance: deeds to realty, 50 cents for each $500 or 
fraction thereof. 

8. Custom house entries: 25 cents to $1. 

9. Entry for withdrawal from customs bonded warehouses: 
50 cents. 

10. Passage tickets to ports and places not in the United 
States, Canada, or Mexico: $1 to $5, depending upon cost of 
ticket ; tickets costing $10 or less, exempt. 



1917] 



The War Revenue Act of 1917 



801 



11. Proxy: 10 cents. 

12. Power of attorney: 25 cents. 

13. Playing cards : 5 cents per pack of 54 cards. 

14. Parcel-post packages: Upon every parcel transported 
within the United States on which the postage is 25 cents or more, 
a tax of 1 cent for each 25 cents or fractional part thereof. 

Title IX, War Estate Tax. The estate or inheritance tax, a 
long-abandoned source of federal revenue, was reintroduced by 
the act of September 8, 1917. 4 The rates of this act were in- 
creased 50 per cent by the preparedness act of March 3, 1917, 
to the amounts shown in the table below. The recent House bill 
superimposed upon the latter law a War Estate Tax which the 
Senate struck out but the main features of which the conference 
committee restored after making a few substantial reductions at 
both top and bottom. The Senators argued that it was best to 
reserve this source of revenue for the several states. Further- 
more, the burden would fall unduly heavily upon the estates of 
those who happened to die during the period of this special war 
tax, and it would be especially unfair to those who died in patriotic 
service. The latter criticism was met by the conferees who exempted 
those dying while serving in the military or naval forces of the 
United States during the present war, or within one year after 
its close, if death results from injuries or disease contracted in 
such service. 

Table 4. — Federal Estate Taxes in Effect October 4., 1917. 



On portion of net 


Law of 


Law of 


Total 


estate* between 


March 3, 1917 


October 3, 1917 




(Per cent) 


(Per cent) 


(Per cent) 


0— $50,000 


1% 


% 


2 


$50,000 — 150,000 


3 


1 


4 


150,000— 250,000 


*V4 


1% 


6 


250,000— 450,000 


6 


2 


8 


450,000— 1,000,000 


7% 


2% 


10 


1,000,000— 2,000,000 


9 


3 


12 


2,000,000— 3,000,000 


w% 


3% 


14 


3,000,000— 4,000,000 


12 


4 


16 


4,000,000— 5,000,000 


13% 


4% 


18 


5,000,000— 8,000,000 


15 


5 


20 


8,000,000—10,000,000 


15 


7 


22 


10,000,000— more 


15 


10 


25 



i An arbitrary deduction of $50,000 is allowed to arrive at "net estate." The 
taxes here indicated are on the excesses above this deduction. 
* See December, 1916, issue of this Review. 



802 Roy G. Bldkey [December 

The House bill provided for a tariff which would have been not 
only a tax upon consumption, but also a source of endless con- 
fusion and difficulty. It provided for a flat increase of 10 per 
cent upon all existing duties and a 10 per cent duty upon all of 
the free list, with a few minor exceptions. As the Senate pointed 
out, this would have meant a combination of both specific and 
ad valorem duties upon all existing specific tariff dutied items. 
The House proposed also an excise tax on stocks of tea and coffee 
already in the United States. 

The Senate Finance Committee struck out the tariff provisions 
of the House bill but substituted a "war excise tax" on stocks, 
importations, and domestic production of coffee, tea, cocoa, and 
sugar. But neither the Senate nor the conference committee up- 
held any of these tariffs or excises. 5 The House proposal of a 
conscription tax upon electric light, gas, and telephone service 
met a similar fate. 

Title XI, Postage Rates, increases the rates on letters, except 
drop letters, to 3 cents per ounce, and on postal and post cards 
to 2 cents each. 

The increased rates upon second-class matter precipitated one 
of the biggest contests connected with the bill. The House bill 
proposed that the zone system, already applicable to the parcels 
post, should apply to second-class mail also; and provided for 
rates for the several zones of from 1V 6 to 4s 1 / 3 cents per pound 
beginning November 1, 1917; and provided further that these 
should be increased March 1, 1918, to iy 2 to 6 cents. The peri- 
odicals of the country were not slow to put up a fight, many of 
them claiming, and probably with truth, that such rates would 
bankrupt them, especially in view of already high costs of paper 
and other printing materials. Nor was it to be expected that the 
interests of these papers would not appeal to a sufficient number 
of congressmen and senators to represent them in both houses. 

The Senate struck out the zone system with its high rates and 
raised the existing flat rate of 1 cent an ounce to 1^4 cents. The 
conferees rewrote the whole section, adopting the House suggestion 
of a zone system for the advertising portions of second-class mail 
matter but increased flat rates for other portions. The rates 
finally adopted were as follows: (a) On the portion of publica- 

6 The "harmony" speech of Senator Boies Penrose in this connection is of 
interest to those who wish to estimate the present position of the old stand- 
pat protectionists. Senate speech of August 13, 1917. 



1917] The War Revenue Act of 1917 803 

tions devoted to matter other than advertising, 1^4 cents per 
pound beginning July 1, 1918, and l 1 /^ cents beginning July 1, 
1919. If the space for advertising does not exceed 5 per cent 
of the total space it takes the same rate as other matter, (b) On 
the portion devoted to advertising, the rates for the eight zones 
of the parcels post system, beginning July 1, 1918, are l 1 ^, l 1 /^, 
lYz, 2, 2 x /4, 2%, 3, and 3 x /4 cents, respectively. Beginning July 
1, 1919, they are iy 2 , 1%, 2, 3, 3%, 4, 5, and 5V 2 cents, respec- 
tively. Beginning July 1, 1920, they are 1%, 1%, %y 2 , 4, 4%, 
&V2, 7, and 7% cents, respectively. Beginning July 1, 1921, and 
thereafter they are, 2, 2, 3, 5, 6, 7, 9, and 10 cents, respectively. 
Rates upon daily papers deposited in a letter carrier office for 
delivery by carriers, and the free circulation of second-class mail 
matter within the county of publication are left unchanged. 

Periodicals entitled to be entered as second-class mail matter 
and maintained by and in the interests of religious, educational, 
agricultural, labor, fraternal, and similar organizations, none of 
the net income of which goes to any private stockholder or indi- 
vidual, are given the following flat rates: 1% cents per pound 
beginning July 1, 1918, and \ X A cents beginning July 1, 1919. 

The above rates are for publishers, their agents, and news- 
dealers. For others mailing second-class matter, the existing flat 
rate of 1 cent for 4 ounces, or fraction thereof, is continued. The 
Postmaster General is required to turn in to the general fund of 
the Treasury each month the estimated excess of receipts due to 
the revision of postage rates under this title. It is further pro- 
vided that salaries of postmasters of offices of the first, second, 
and third classes shall not be increased after July 1, 1917, during 
the present war, and that the compensation of postmasters of 
fourth-class offices shall be computed on the basis of the rates of 
postage in effect prior to the enactment of this law. 

Title XII, Income Tax Amendments. It will be recalled 8 that 
Title I of the act of September 8, 1916, was an entire rewriting 
of the original income tax section of the act of October 3, 1913 
(Underwood bill). Title XII of the recent act consists of miscel- 
laneous amendments to Title I of the 1916 act, the most important 
of which will be discussed below. 

Information-at-the-source is substituted for collection-at-the- 
source except in the cases of (a) interest on coupon bonds and 

«See December, 1916, issue of this Review. 



804 Roy G. Blakey [December 

(b) incomes derived by non-resident aliens from American sources. 
One section apparently provides that any 1917 income tax already 
withheld at the source shall be returned to the individual, though 
local trust companies are advising withholding agents to wait for 
a ruling by the Secretary of the Treasury upon this point. 

The Commissioner of Internal Revenue and the Secretary of 
the Treasury had urged the change to information-at-the-source 
before Senator Simmons, chairman of the Finance Committee, and 
other senators and congressmen took up its advocacy. Of the 
$360,000,000 income tax collected last year, Senator Simmons 
stated that less than $9,000,000 was collected at the source. 7 

The Secretary of the Treasury in his recommendation of the 
change, said: 

I desire very earnestly to impress upon those charged with the 
enactment of income-tax legislation that it is the department's judg- 
ment, based upon a close observation and study of the practical work- 
ings of the "withholding" feature of the income-tax law, as well as 
the general requirements of administration, that "information at the 
source" is a foundation upon which the administrative structure must 
be built if the income-tax law is to be rendered most effective, and if due 
regard is to be paid to economy and simplicity of administration and 
to the imposition of no greater burden and expense upon tax payers 
than is necessary for effective administration. 

A very large proportion of all claims for refunds under the income 
tax (approximately 80 per cent) arise out of excessive and erroneous 
withholding at the source. As the average cost of adjusting a claim 
for refund is $10, a very considerable economy will result from doing 
away with the expenses incident to withholding at the source. 

This change will relieve many withholding agents of much an- 
noyance and expense, it will allow the taxpayer longer use of his 
money, and relieve him of the risk of insolvency of the withholding 
agent. 

In many sections of the income tax title, amendments are in- 
serted to provide for the levying of the extra war taxes and, possi- 
bly of other taxes, upon future issues of United States bonds and 
similar federal obligations. One amendment makes United States 
certificates of indebtedness and ordinary bank checks receivable 
for taxes. 

Another amendment, applicable to both 1916 and 1917 income 
taxes, provides for the exemption of gifts for charitable, religious, 
educational, and scientific purposes, to the extent of 15 per cent 
of the payer's taxable net income. 

' Senate speech of August 10, 1917. 



1917] The War Revenue Act of 1917 805 

Besides the exemption for heads of families, an additional ex- 
emption of $200 is made for each dependent child under eighteen 
years of age. 

A very ambiguous amendment provides for a tax of 10 per cent 
on corporation surpluses remaining undistributed six months after 
the close of the year. It is then provided that: 

The tax imposed by this subdivision shall not apply to that portion 
of such undistributed net income which is actually invested and em- 
ployed in the business or is retained for employment in the reasonable 
requirements of the business or is invested in obligations of the United 
States issued after September 1st, 1917: Provided, That if the Secre- 
tary of the Treasury ascertains and finds that any portion of such 
amount so retained at any time for employment in the business is not 
so employed or is not reasonably required in the business, a tax of 
fifteen per centum shall be levied, assessed, collected, and paid thereon. 

It is possible that the contradictory language of the text means 
to provide for a penalty of 5 per cent if the improper retention 
is concealed and later discovered by the Secretary of the Treasury. 

Excess profits taxes of the recent law are allowed as a deduc- 
tion in arriving at taxable net income subject to the ordinary 
(1916) income tax, and presumably this applies to the war in- 
come tax also. 

Income from American securities owned by foreign governments 
is not subject to the ordinary income tax and presumably not to 
the war income tax either. 

There are several other ambiguities, among them the question 
of whether or not the income tax is applicable to the salary of 
the President of the United States for his present term and to 
the salaries of federal judges who have taken office since the pas- 
sage of the original income tax of October 3, 1913. The answer 
turns on the significance of the word "present" in an amendment 
which repeats the text of a former law in all particulars except 
one which is relatively unimportant and not closely related to the 
matter in question. Originally it meant 1913. Does its repeti- 
tion to amend a section by including a clause about another matter 
in the latest law make it mean 1917? 

As indicated above these miscellaneous amendments of Title XII 
apply only to the ordinary (1916) income tax and not to the 
extraordinary taxes of the most recent revenue act, except by 
cross reference in some cases. 

The act of October 3, 1917, takes effect on the day following 



806 Roy G. Blakey [December 

its passage, unless otherwise specially provided therein. The fol- 
lowing exceptions to this general rule are specially provided for : 

1. The collection of the 2 per cent war "normal" tax at the 
source is not effective, where effective at all, until January 1, 1918. 

2. The taxes on cigars, tobacco, and manufactures thereof, 
Title IV, take effect thirty days after the passage of the act. 

3. The taxes under Title V, War Taxes, on Facilities Fur- 
nished by Public Utilities and Insurance, are effective November 
1, 1917, as are also the taxes on admissions and club dues and 
fees of Title VII. 

4. The War Stamp Taxes, Title VIII, take effect December 
1, 1917. 

5. The new postage rates on first-class mail take effect thirty 
days after the passage of the act, and the second-class mail rates 
are changed on July 1 of each year from 1918 to 1922, inclusive. 

Considering our historical precedents, both remote and recent, 
and the presuppositions of our senators and congressmen, as well 
as of their constituents, and especially the general lack of in- 
formation regarding war financiering, the law as passed probably 
comes up to what we might reasonably have expected. But great 
as has been the increase in taxation provided for and heavy as 
will be the burdens thereof, the present writer does not believe 
the recent act provides for as large a proportion of the total war 
expenditures as would be wise if the people of the country, espe- 
cially the business men, were psychologically prepared for such 
taxation. The reasons for this opinion have been discussed more 
at length elsewhere, 8 but will be taken up very briefly a few para- 
graphs below. 

The House bill had all the earmarks of the hasty consideration 
which was given it; but it did evince a willingness to meet an 
emergency promptly and to meet it in approximately full measure, 
according to the then-considered heavy demands of the adminis- 
tration. Although the Senate seemed disposed to reduce sub- 
stantially the aggregate of the House levies, the rapidly growing 
estimates of war needs urged upon it by the Secretary of the 
Treasury resulted in its increasing the levies. Furthermore, the 

s "Effects of Taxes and Bonds In War Finance," South Atlantic Quarterly, 
voL XVI, no. 3 (July, 1917), pp. 236-247. Also in a paper presented before 
the American Academy of Political and Social Science, Philadelphia, Nor. 2, 
1917. There have been recently several papers and brochures on this subject 
by others than the present writer. 



1917] The War Revenue Act of 1917 807 

Senate, and especially its finance committee, is to be commended 
for the careful way in which it took up the consideration of the 
measure, and for the marked improvements and adjustments which 
it made. 

Among these improvements which were adopted in the final 
enactment of the law were the elimination of the retroactive in- 
come tax provision, the very ill-considered tariff section and the 
consumption taxes on light, heat, and household telephone service. 
The present writer does not think that the Senate Finance Com- 
mittee's proposed taxes on tea, coffee, cocoa, and sugar would 
have reached the best available sources of revenue, but they would 
not have been very bad, because they would have been some induce- 
ment to economy in the use of the semi-luxuries of tea and coffee, 
and it is not probable that they would have effected the retail 
price of sugar very much under the conditions of high profits 
which producers are now making, and under domestic prices which 
are at present controlled by European markets. This would be 
true even if price fixation were not attempted in this country. 
But these taxes were struck out by the Senate and not restored 
by the conferees. 

The elimination of the estate tax by the Senate for the reasons 
given was probably wise in a bill raising no larger an amount than 
the one enacted. There are other better available sources. It 
is almost certain that this source will be called upon for heavier 
contributions, and, in all probability, properly so, if the war con- 
tinues more than a year and greater taxation is necessary. But 
under present conditions, and with rates of other taxes as they 
are, the restoration of this section by the conferees, even with 
one good amendment, was not an improvement. 

The conferees' compromise on second-class mail rates seems 
wiser than the proposal of either house. There is no reason why 
advertising, especially so much of the objectionable advertising, 
should be carried at a loss to the government. The same reason- 
ing does not hold so clearly in the case of really educational read- 
ing matter. The writer wishes, however, that there were some 
practical method of differentiating between various classes of more 
or less popular reading matter, much of which may not be very 
bad, but which is of doubtful social utility and hence undeserving 
of public subsidy. 

The House tax oh automobiles, radically changed by the Sen- 
ate, but restored with lower rates in the enacted bill, will probably 



808 Roy G. Bldkey [December 

cause less friction and be easier of administration, as well as more 
productive, than the Senate's proposal, but the very annoyance 
which would have been caused each owner by the Senate's pro- 
posal would probably have had more effect in the reduction of 
the number of automobiles used. There is much hazy thinking 
on the part of most people who advocate taxation of automobiles, 
gasoline, etc., to induce economy. No doubt these taxes will 
have some effect in this direction and are better than nothing, 
but they are not drastic enough, and are not likely to be soon. 
There is probably no other industry in this country that can be 
converted to war purposes so easily as the automobile industry, 
nor one which is making such demands upon men and raw ma- 
terials needed for the war and which is supplying utilities so large 
a proportion of which the public could easily dispense with in 
times that demand economy and sacrifice. It is surprising that 
the government has not before this commandeered its services. In 
the strain which this war will put upon us, the little taxation which 
we have put, or are likely to put, upon automobiles, gasoline, et 
cetera, is comparatively futile. The manufacture of pleasure cars 
and the use of gasoline for such should be prohibited. The same 
principle applies to a number of lesser industries. Significant 
action has already been taken in the matter of liquor manufac- 
ture; it might well go further. The limit is what the public will 
stand for. One of the largest problems before us is to educate 
the public to the real facts and necessities of the situation, so 
that it will willingly do those things that are for its own ultimate 
best interests. 

But the biggest controversies in the passage of the revenue bill 
were not over the above-mentioned matters, but over the rates 
and bases of the war income and excess profits taxes. These are 
by far the most important taxes in the bill, being estimated to 
yield together about three fourths of the entire amount, as men- 
tioned near the beginning of this paper. The House bill pro- 
vided for extra, or war, "normal" income taxes of 2 per cent on 
both individual and corporate incomes; the Senate and also the 
conferees decided upon 4 per cent for corporations. This extra 
amount on corporations was justified by its sponsors by the fact 
that they are not subject to the war "additional" income taxes 
as are individuals. This differentiation ignores the fact that cor- 
poration dividends, when distributed to stockholders, become sub- 
ject to both the ordinary (1916 law) and war (1917 law) "addi- 



1917] The War Revenue Act of 1917 809 

tional" income taxes. These stockholders, whether of large or 
small, of poor or prosperous, corporations, may themselves be of 
all varieties of financial conditions; they may be widows, mod- 
erately well-to-do persons, or millionaires. 

Much criticism was made of the high rates of the war "addi- 
tional" tax as adopted by the House, but the rapidly increasing 
needs while the bill was under consideration caused the Senate 
and the conferees to raise these rates and also to apply them 
to smaller incomes. These war "additional" rates begin at 1 per 
cent on amounts above $5,000 (instead of above $20,000 as in 
case of the ordinary — 1916 — "additional" tax), and increase to 
50 per cent of the net income in excess of $1,000,000. That is, 
the total federal income taxes, exclusive of war excess profits 
taxes, which are to be levied upon the excess above $2,000,000 
of net incomes of individuals, are: (1) the ordinary (1916) "nor- 
mal" tax of 2 per cent, and (2) "additional" tax of 13 per cent 
plus (3) the war (1917) "normal" tax of 2 per cent and (4) 
"additional" tax of 50 per cent, a total of 67 per cent. (See 
Table 2 above.) These taxes are very high compared with what 
we or other countries have been used to and some doubt the possi- 
bility of administering them efficiently. But in this connection 
we may quote Professor T. S. Adams : 

Personally I feel very modest about all this. Had I been told in 
August, 1914, that England would soon be levying a normal income 
tax of 25 per cent; progressive income taxes which carried the upper 
limit to 42 per cent; and excess profits taxes rising to 60 per cent or 
80 per cent, I should have repudiated the whole proposal or program 
as revolutionary, and should have done it with much heat and cer- 
tainty. The event has proved, however, that the common legislators 
of England were wiser than students like myself. 9 

While one of the fundamental struggles relative to the war 
"excess" profits tax was over the rates, the most difficult matter 
to decide properly was the basis of this tax, or rather, the basis 
of the exemption, or deduction, before the tax was to apply. The 
big objection to the flat rate exemption of 8 per cent of invested 
capital of the House bill was the difficulty of ascertaining accu- 
rately the real invested capital in each case. The Senate Finance 
Committee made much of the admittedly great administrative dif- 
ficulties this would involve, besides pointing out that the railroads 
would then be allowed almost entire exemption. On the other 

» From a letter of September 24, 1917, to Professor E. R. A. Seligman, chair- 
man of a committee of which the writer is a member, 



810 Roy G. Blakey [December 

hand, the proponents of the House bill and of some amendments 
to the Senate Finance Committee's bill urged very strongly the 
injustice of the exemption of pre-war profits. It was charged that 
those business men who first sponsored this idea wanted the years 
1914, 1915, and 1916 taken as the pre-war period. To make 
profits of this period, which in many instances were one hundred 
to one thousand per cent, the basis of exemption for all future 
years, would almost wholly exempt the enormous profits of many 
of our largest corporations and would be manifestly unfair. This 
was so obvious that the Finance Committee adopted the years 
1911, 1912, and 1913 as the pre-war period. Specific cases were 
pointed out to show that this selection was unfair. For example, 
the automobile industry was very prosperous during those years, 
while the lumber industry was much depressed. If three previous 
years were taken, the reverse was true. As a result of this op- 
position, the Finance Committee proposed a minimum exemption 
of 6 per cent and a maximum of 10 per cent of the capital in- 
vested. Though it seemed to admit it reluctantly, this was an 
abandonment of its chief objection to the House basis. As noted 
above, the final enactment was an adoption of this compromise, 
with the maximum and minimum changed to 7 per cent and 9 per 
cent, respectively, and with the different steps or brackets of the 
graduated rates made to relate to certain percentages of the in- 
vested capital instead of to percentages of the exemption. It 
should be noted in this connection that the Senate adopted high 
graduated rates and really made this the fairest source of war 
revenue very productive in contrast with the House proposal to 
take the comparatively insignificant flat rate of 8 per cent which 
would have yielded only one fifth as much, according to the esti- 
mates. 

The people of this country do not appreciate how fortunate, 
one might truly say how lucky, we are that our income tax law 
has been in force since 1913, so that we have had a little experi- 
ence with it and some of the administrative machinery developed. 
Of course we are as fortunate or possibly even more fortunate in 
having adopted our federal reserve system the same year. It would 
be well if our tax machinery could have been developed over a longer 
period and more gradually, but we are much better prepared in 
this respect than we were at the beginning of the Civil War. We 
are not at all certain how the machinery is going to stand the 
strain put upon it, but we shall be extremely interested observers 
and well wishers. 



1917] The War Revenue Act of 1917 811 

But some one will ask, If you are uncertain as to how the tax 
machinery will stand the strain, why do you say above that you 
do not consider the levies of the new war revenue act heavy 
enough? The answer is that the people best able to pay taxes 
in this country are not yet psychologically prepared to pay what 
they should and that neither they nor the masses have yet grasped 
the enormity of the undertaking upon which we have entered. If 
they had, then they would be more nearly prepared to make the 
sacrifices required. 

To carry out what we have undertaken, if this war lasts much 
longer, will force sacrifices little dreamed of as yet upon nearly 
all of us. Who of us realizes the significance of appropriations 
and authorizations of $21,000,000,000 in the first year of our 
participation in the war? The expenditures of the European 
belligerents have risen rapidly each succeeding year; but $21,- 
000,000,000 is just about equal to the total expenditures of Great 
Britain in three years of war, and her expenditures have been the 
heaviest of any of the Allies. 

But neither this fact nor the fact that the amount is twenty- 
fold our usual federal taxes brings home to us what it really 
means. In characteristic American style we boast of the greatest 
country on earth and complacently take it for granted that we 
can do anything. What difference does ten or a hundred billion 
make to us? Congress can make the appropriations and authorize 
the taxes and bond issues, and, while they may inconvenience us 
slightly, still they amount to very little for this nation. Most 
of this is true on paper, but we haven't gotten much farther than 
the paper as yet. 

What is accepted by most economists as the most careful in- 
vestigation of our total national income, that of Professor W. I. 
King, puts it at $30,000,000,000 for 1910. Professor E. Dana 
Durand says: 10 

His estimate for 1910, which I have checked with some care, was 
in round numbers, $30,000,000,000. In view of the increase of popu- 
lation, the speeding up of industry, and the inflation of the currency, 
it is probable that the present figure would be around $4-0,000,000,000 ; 
it might possibly be $45,000,000,000. Needless to say, the real in- 
come has not increased in such a ratio, but we are dealing with income 
expressed in terms of money. 

io Financial Mobilization for War. Papers presented at a joint conference 
of the Western Economic Society and the City Club of Chicago, June 21 and 
22, 191T. 



812 Roy G. Blakey [December 

Out of this income our people have to live, of course. Only 
what they can do without can be devoted to war purposes. But 
if we are to raise what has already been appropriated, even if we 
could devote to war all that we have been investing in new capital, 
it is necessary that the average consumption of the nation shall 
be cut to two thirds or a half of what it has been. We have not 
seen any evidences that we are yet psychologically prepared to 
make such sacrifices. 

But some unthinking person — and there are many of them in 
the United States — wanting to avoid the necessity of heavy taxa- 
tion, says why not borrow what we need, unmindful of the fact 
that what we borrow must come out of the national income, that 
is, that it merely causes certain citizens, rather than others, to 
cut down consumption. At this writing we are in the beginning 
of the second Liberty Loan Campaign to raise $3,000,000,000. 
Secretary McAdoo announces that we shall have to raise thirteen 
or fourteen billion dollars more before June 30 next. If the people 
of the country do not economize enough by cutting down their 
consumption of automobiles, liquor, tobacco, clothing, et cetera, 
to this extent, the only way this amount can be raised is by in- 
flation. To avoid this inflation is one reason why we advocate 
heavier taxation and even the absolute prohibition of the making 
of many luxuries. The labor and materials devoted to them should 
be turned directly or indirectly to war needs, and in many cases, 
taxation does not effect this as rapidly as the present emergency 
requires. Even with heavy taxation, the recipients of many in- 
comes will still demand luxuries. 

I shall not here take the time and space to discuss the evils of 
inflation and how it bears down with crushing burden upon those 
with small and relatively fixed incomes. That has been treated 
at length elsewhere. Proper taxation forces economy and pre- 
vents excessive inflation. Theoretically, bonds may be sold with- 
out causing inflation, but practically I do not believe they can be 
on the scale that is now authorized. We should not let ourselves 
be misled or confused by the money medium. What the govern- 
ment must have ultimately is not money, but men and commodities. 
We must give up these things. The government must get com- 
mand of them through funds secured by borrowing, or by taxing, 
or by both. In any case, we consumers have to do without them. 
The fundamental consideration in the controversy over bonds 
versus taxes is, Which causes the greatest and wisest economy? 



1917] The War Revenue Act of 1917 813 

Among persons of equal means, some are in a much better position 
to economize at this time than are others ; hence, some borrowing 
is socially justifiable because it allows accommodation as between 
individuals. But the more important fact is that the man who 
lends the government money by buying a bond is less likely to cut 
down his consumption than if he pays the same amount in taxes. 
This for two reasons : first, because he doesn't feel so poor, since 
he expects to be paid back later with interest, and hence does not 
feel the necessity of economizing; and, second, because he can 
often borrow on the security of his bond, and hence really does 
not have to economize as he would if he had paid taxes of an 
equal amount. He forgets that he (or his heirs) may be taxed 
later to pay himself interest and principal which he will receive, 
though he may be successful in avoiding part of his just taxes 
then. To the extent that he doesn't cut down his consumption, 
others must do so the more. 

This almost universal attempt to shirk the practice of economy 
as much as possible brings a pressure upon the banks which they 
cannot resist, and makes it necessary for them to be accommo- 
dating in order to help the government float bonds, or even to 
keep many men from bankruptcy. Much of the inflation of the 
past has been through the issue of paper money. No one now 
advocates this openly. But in condemning paper money some 
seem to overlook the fact that bank deposit inflation is just as 
effective and more subtle, and in our present stage of banking, the 
most natural thing imaginable. Despite the contentions of those 
who say that inflation is not a necessary accompaniment of large 
bond issues, all of our history and the recent and present experi- 
ence of European countries indicate that it is almost inevitable. 
Because of the seriousness of this matter, the following quotation 
from Professor A. C. Miller, one of the members of the Federal 
Reserve Board, is given: 

When the amendments which have just passed Congress, providing 
for a greater concentration of the gold holdings of the country in the 
federal reserve banks, become effective, the twelve federal reserve 
banks will have a normal credit-lending and note-issuing power in 
the aggregate of about $2,000,000,000. Thus far, less than one-fourth 
of this power has been utilized in extending accommodation to the 
money markets of the country, whether through the member banks 
of the federal reserve system or otherwise through open-market opera- 
tions. The system possesses, therefore, an untouched margin of lend- 
ing power of some $1,500,000,000. When it is recalled that a dollar 



814 Roy G. Blakey [December 

of reserve credit extended to a member bank by a federal reserve bank 
may multiply itself by fivefold or more in the lending power of the 
member bank, it is at once apparent that the banks composing the 
federal reserve system — member banks and federal reserve banks to- 
gether — have a potential credit capacity for the borrowing community 
of some $7,500,000,000. This is an enormous potential credit power. 
But it is important that we should recognize that such power has its 
dangers and temptations as well as its protective strength and re- 
assurance. To the expansionist it opens alluring vistas of inflation. 
By its wise use, however, it is capable of becoming at critical times 
a factor of decisive importance in the credit operations which will 
have to be undertaken during the period of the war — a bed rock of 
strong and wise finance. 

The danger of the loan policy is that, by deluding itself with a 
notion that it is putting the burden onto the future, it will, through 
resort to fatuous and easy expedients, put the burden both on the 
present and on the future. This will happen if the loan policy, fail- 
ing to induce a commensurate increase in the savings fund of the 
nation, degenerates, through the abuse of banking credit, into infla- 
tion — raising prices against the great body of consumers as well as 
against the government, thus needlessly augmenting the public debt, 
and increasing the cost of living just as taxes would. The policy of 
financing war by loans, therefore, will be but a fragile and deceptive 
and costly support unless every dollar obtained by the government 
is matched by a dollar of spending power relinquished by the com- 
munity — in other words, will fail and develop into inflation unless the 
dollars which are subscribed to the bonds of the government are real 
dollars, the result of real savings and of real retrenchment. The 
danger to be feared in undertaking to finance our war by credit is 
that sophistry and financial legerdemain may lead us to attempt to 
carry the operation through as an operation in banking finance instead 
of as an operation in saving and investment. The doctrine is already 
current in the country, with the sanction of some leading bankers, 
that our war cannot be financed except by credit expansion running 
to the limits of inflation. Being dealers in banking credit, they nat- 
urally take the view that the expansion of credit in question will prop- 
erly have to be an inflation of banking credit; for this is the new and 
most recent form of inflation which the gigantic war in Europe has 
been bringing to the front as a device in war finance. 11 

These are some of the reasons why I think that heavier taxa- 
tion should be adopted; and why it is so urgent that the people 
be educated to see things as they really are, not as they seem to 
be when glimpsed through the confusing veil of the money medium. 

n Financial Mobilization for War, pp. 140 and 145. Paper presented at a 
joint conference of the Western Economic Society and the City Club of Chi- 
cago, June 21 and 22, 1917. 



1917] The War Revenue Act of 1917 815 

If the taxation under the new revenue law is as heavy as can be 
administered efficiently now, we must educate ourselves to the real 
facts so that we shall be psychologically prepared to sacrifice 
more. Unfortunately, voluntary sacrifices are not likely to be 
sufficient in this great emergency; hence the desirability of draft- 
ing, so that the burden will be more equitably distributed and so 
that the war may be won at the least cost in lives and goods. The 
writer is heartily in sympathy with our part in this great war 
to "make the world safe for democracy," we could not keep out 
of it horrible as it is ; but is it wise to weaken our own present 
fighting strength and to jeopardize our own democracy, when bet- 
ter methods will gain our ends much more effectively? 

Roy G. Blakey. 
University of Minnesota.